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The Canadian dollar appreciated on Wednesday with the bigger than expected drawdown in weekly US crude inventories reported by the Energy Information Administration (EIA). The loonie alongside other commodity currencies were the biggest winners against the USD.

The high correlation between the CAD and the price of oil meant that as the market was unsure of how much an extension to the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement would boost prices the currency had no support while battling on up to three different fronts. The Trump administration had increased the combative rhetoric and sprung into action with tariffs against the Canadian lumber industry in the preamble of the NAFTA renegotiation talks. U.S. President Donald Trump made good on his campaign promise to take the US out of the Trans Pacific Pact (TPP) and put NAFTA on notice back in his inauguration.

Weak economic fundamentals after an impressive first quarter had the loonie under pressure and alongside increasing political risk around the globe the currency was one of the worst performers this year. The more than 4 percent rise in oil prices today will help the CAD regain some of the ground lost, but is still too early to know if this price move represents a new phase for the Canadian dollar or just a temporary move.

The USD/CAD lost 0.598 percent in the last 24 hours. The currency is trading at 1.3656 after the impressive recovery of oil prices after the US oil inventories showed a bigger drawdown than expected. Commodity currencies were boosted by the fall in US crude inventories.

The Group of Seven (G7) Finance summit meets in Italy later this week. Trade is not front and center in the agenda, despite the rise of protectionist measures around the world. Finance ministers and central bank governor will focus on inequality, international tax rules, cyber security and blocking the funding of terrorism. Canadian officials will be sure to approach their US counterparts about trade while it is also expected EU and UK counterparts discuss the impact of Brexit not only in their economies but its effect for the G7 at large.

The Canadian economic calendar is slim this week. Already housing starts and building permits have disappointed and up next is the New Housing Price Index (NHPI) to be released on Thursday, May 11 at 8:30. Prices are expected to have growth by 0.20 percent. New regulations in the hottest markets appear to have cooled prices as anxiety around the country’s largest non-bank lender has subsided. Home Trust Capital has indicated that the withdrawal rate it had experienced is slowing down after the initial run on deposits in late April.

Oil prices surged by 3.754 percent on Wednesday. The price of West Texas is trading at $47.46 after the release of the US crude oil inventories showed a sharp drawdown of 5.2 million barrels last week. This is the largest drawdown in 2017 and managed to move the needle on prices. The OPEC has tried to reassure the market that an extension to their production cut agreement is coming but with doubts around the overall effect prices kept dropping. Lower inventories managed to break the stalemate. Again supply disruptions, this time caused by the weather in the Gulf of Mexico, are driving prices higher despite the sluggish growth in demand.

The inventory data also hints at a slowdown in US production. The growth in shale drilling had offset the OPEC and major producer pact effect on prices. The OPEC and other major producers will meet on May 25 to discuss the terms of an extension to their agreement. While Saudi Arabia has said that it will do whatever it takes to rebalance the oil market other producers might not share that level of commitment

Market events to watch this week:

Thursday, May 11
4:30am GBP Manufacturing Production m/m
7:00am GBP BOE Inflation Report
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
8:30am USD PPI m/m
8:30am USD Unemployment Claims
Friday, May 12
All day G7 Meetings
8:30am USD CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment
Saturday, May 13
All day G7 Meetings

What political headlines matter and which ones don't? That's the question we look at today. The New Zealand dollar was the top performer while the yen lagged on Tuesday but after the RBNZ added guidance to its statement, the kiwi plunged.

Perhaps we were premature to expect that political risks would fade in the months ahead. Or maybe not, for all the hand-wringing about the Comey firing, markets didn't show any sign of caring. Theoretically, it could derail or delay the legislative agenda but Trump could also appoint someone new who buries the investigation and lets him move on.

Trump doesn't matter to markets as as he does to newspapers. Let's backup and look at the framework since election night. Markets rallied not because Trump became president, but due to Republicans' win in all three branches on an agenda of stimulus and tax cuts.

So what are the risks? Assume the longshot scenario of a Trump impeachment. Even then, Pence as president and Republicans would have control. So the real risk is disarray and disorganization within the Republican party. That's a genuine risk and is the factor to watch rather than troubles at the White House.

In the meantime, it was another light data day with more hawkish Fed talk. That led to another steady US dollar bid in North American trade – especially in USD/JPY. Also note that a Treasury auction was soft for the second day and that boosted the dollar late in the day. A long-bond sale is scheduled for Thursday.

In Asia-Pacific trading, the New Zealand dollar was hammered more than a cent lower. The RBNZ held rates unchanged as expected but said policy will remain accommodative for a considerable period. They said inflation was expected to moderate further and the fall in the kiwi since February was welcome. NZD/USD plunged through stops to the lowest since last June on the headlines.

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand's trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.

GDP growth in the second half of 2016 was weaker than expected. Nevertheless, the growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.

House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually. This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

Read the Monetary Policy Statement

With Inflation Rising Fast, Could the BoE Be Forced to Consider Raising Interest Rates?

The Bank of England finds itself in another tight spot when it meets on Thursday – or Super Thursday as it's become known since the addition once a quarter of the inflation report and Governor Mark Carney's press conference.

It seems that policy makers at the central bank have found themselves in a permanent tight spot since last June's referendum. The constant balancing act of trying to manage the UK through a highly uncertain period of higher inflation and lower growth while try to maintain accurate forecasts is a rather unenviable position. On top of this, the bank has faced constant fierce criticism regarding it pre-referendum position on what Brexit would mean for the economy and the fact that the impact has so far been more muted.

To complicate matters even further this month, the central bank must make its latest decision – which is likely to be a straightforward "no change" – and provide new forecasts less than a month before the UK once again heads to the polls to vote in a snap general election, called by Theresa May in an attempt to solidify her position as she prepares for Brexit negotiations with the EU. Needless to say, I think Carney and other policy makers will keep their opinions firmly to themselves on this occasion.

What traders will be most interested in though is the BoEs expectations for inflation and interest rates. One policy maker – Kristin Forbes – has already voted for a rate hike and is likely to again on Thursday. Whether any other policy makers follow will likely depend on whether inflation forecasts have risen, by how much and what impact this has had on consumer inflation expectations. The latter would be the greatest concern for the central bank as it could result in temporary above target inflation becoming permanent.

Inflation has been on the rise since the June referendum and with CPI inflation currently at 2.3% and core CPI inflation at 1.8% (BoE target is 2%), the forecasts will be key. The BoE previously claimed that it expected inflation to rise to 2.8% in the first half of 2018 before gradually falling back to 2.4% in 2018. Should the latest forecasts point to higher inflation expectations, this could convince more policy makers to join Forbes in voting for a hike at an upcoming meeting.

The timing of the report tomorrow is clearly not ideal, coming less than a month before the election. It will therefore be interesting to see just how far the central bank deviates from its previous message on both inflation and interest rates, or whether it actively seeks to avoid changing course given the proximity to the election. A rate hike seems extremely unlikely tomorrow but should expectations rise and more policy makers vote for a hike, then rate hike expectations would likely be brought forward which could be bullish for sterling and UK yields.

Whatever happens, given the sheer volume of information coming from the BoE tomorrow, I would expect UK markets to be volatile.

GBP/USD is almost unchanged in the Wednesday session. In North American trade, GBP/USD is trading at 1.2950. On the release front, there are no major events in the UK or the US. Thursday will be busy on both sides of the pond. The BoE will set its benchmark rate and release the inflation report, and the UK releases Manufacturing Production. In the US, there are two key releases – PPI and unemployment claims.

The British consumer continues to spend, as underscored by a report that showed retail sales in BRC stores jumped 5.6% in April compared to a year ago. The sharp increase underscores that consumer spending remains resilient, but there are growing concerns that this trend will change in 2017. Analysts point to two major areas of concern. First, the weak British pound means that consumer purchasing power has decreased, since imported goods have become more expensive. Second, the triggering of Article 50 and the upcoming negotiations with the EU over Brexit is causing uncertainty about the economy and jobs, and this means that consumers will be holding back on buying major items. If consumer spending, a key driver of economic growth, weakens, the pound could follow suit and lose ground.

President Donald Trump is no stranger to controversy, but the political earthquake he has now stirred could become political quicksand for the new president. Trump abruptly fired FBI director James Comey on Tuesday, stunning lawmakers on both sides of the aisle. Comey, who has been conducting an investigation into possible collusion between Trump and Russia during the presidential campaign, clearly has been a thorn in Trump's side. The White House has claimed that it fired Comey over his handling of an email scandal involving Hillary Clinton, but the move has been roundly condemned by the Democrats, and some key Republicans have also voiced opposition as well. The firestorm could heat up further, with calls in Congress to appoint a special prosecutor into Trump's connections with Russia. Has Trump gone one step to far? This latest controversy could cause some jitters among investors and send the greenback to lower levels.

USD/CHF - 1.0080

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 1.0072

Kijun-Sen level                    : 1.0067

Ichimoku cloud top                 : 1.0009

Ichimoku cloud bottom              : 0.9961

Original strategy :

Buy at 1.0005, Target: 1.0105, Stop: 0.9970

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0015, Target: 1.0115, Stop: 0.9980

Position : -

Target :  -

Stop : -

As the greenback has maintained a firm undertone after this week’s rally, adding credence to our view that recent upmove is still in progress and may extend further gain to previous resistance at 1.0108, break there would confirm resumption of early rise and encourage for headway to 1.0130 and then 1.0150-55 which is likely to hold from here due to loss of near term upward momentum. 

In view of this, would not chase this rise here and we are looking to buy dollar on pullback as 1.0010-15 should limit downside. Only below previous resistance at 0.9957 would defer and suggest top is possibly formed, bring test of 0.9920-25 but break of previous resistance at 0.9903 is needed to add credence to this view, bring further fall to 0.9880-85.

GBP/USD - 1.2943

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2958

Kijun-Sen level                    : 1.2955

Ichimoku cloud top              : 1.2947

Ichimoku cloud bottom        : 1.2933

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Although cable rebounded to 1.2988 in London morning, the subsequent retreat has retained our view that further consolidation below resistance at 1.2991 would be seen and weakness to 1.2920 cannot be ruled out, however, reckon downside would be limited to support at 1.2903 and bring another rise to 1.2999-00 (1.236 times projection of 1.2109-1.2616 measuring from 1.2365 and psychological resistance), break there would signal recent upmove has resumed and extend further rise to 1.3040-50, then towards 1.3075-80 which is likely to hold from here due to near term overbought condition. 

In view of this, would be prudent to stand aside in the meantime. Below said support at 1.2903 would revive near term bearishness and suggest a temporary top has been formed at 1.2991, bring correction to 1.2875-80 but price should stay well above last week’s low at 1.2831.

EUR/USD - 1.0869

Most recent candlesticks pattern   : N/A

Trend                      : Near term down

Tenkan-Sen level              : 1.0878

Kijun-Sen level                  : 1.0883

Ichimoku cloud top             : 1.0950

Ichimoku cloud bottom      : 1.0908

Original strategy  :

Sell at 1.0955, Target: 1.0855, Stop: 1.0990

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.0955, Target: 1.0855, Stop: 1.0990

Position : -

Target :  -

Stop : -

As the single currency has remained under pressure, suggesting the fall from 1.1025 top is still in progress and bearishness remains for this decline to extend weakness to 1.0851 support, break there would bring at least a strong retracement of early upmove towards 1.0825-30 but reckon 1.0800 would hold from here due to near term overbought condition.

In view of this, we are looking to sell euro on recovery as 1.0960-70 should limit upside. Above resistance at 1.0997 would bring retest of said resistance at 1.1025, however, break there is needed to signal recent upmove from 1.0340 low has resumed for headway to 1.1050 but reckon upside would be limited to 1.1065-70 (61.8% projection of 1.0602-1.0951 measuring from 1.0851).

USD/JPY has ticked higher in the Wednesday session. In North American trade, the pair is trading just below the 114 line. On the release front, the Bank of Japan published its summary of opinions. There are no major releases out of the US. On Thursday, PPI is expected to show a slight gain of 0.2%, and unemployment claims is forecast to climb to 245 thousand.

The BoJ released its summary of opinions from its April policy meeting. BoJ board members recommended that the central bank maintain its ultra-loose accommodative policy due to global downside risks. At the same time, the economy had improved, boosted by stronger exports and production. The summary stated that the BoJ should upgrade its economic assessment to state that the economy "has been turning towards a moderate expansion". On the inflation front, policymakers predicted that inflationary pressures would increase, but that the inflation target of 2 percent would not be attained before 2018. The summary reiterates the cautious optimism that characterized the BoJ rate statement in April – global demand has boosted the economy, but it's too early too make any changes to the BoJ's current quantitative easing program.

The yen continues to slide, and has lost 4.7% since April 17. The dollar pushed above the 114 line on Tuesday, as a soft Japanese wage growth report weighed on the yen. Wage growth declined 0.4% in March, marking the sharpest decline since June 2015. Prime Minister Abe's government has urged businesses to raise worker's wages, but the message has largely fallen on deaf ears, even with a tight labor market. A sluggish economy and weak consumer spending have dampened business confidence, so businesses are showing little appetite for raising wages and thus incurring more expenses.

Donald Trump's unconventional style has caused consternation and uneasiness in the markets, but the political earthquake he has now stirred could become political quicksand for the new president. Trump abruptly fired FBI director James Comey on Tuesday, stunning lawmakers on both sides of the aisle. Comey, who has been conducting an investigation into possible collusion between Trump and Russia during the presidential campaign, clearly has been a thorn in Trump's side. The White House has claimed that it fired Comey over his handling of an email scandal involving Hillary Clinton, but the move has been roundly condemned by the Democrats, and some key Republicans have also voiced opposition as well. The firestorm could heat up further, with calls in Congress to appoint a special prosecutor into Trump's connections with Russia. Has Trump gone one step to far? This latest controversy could cause some jitters among investors and send the greenback lower against the safe-haven Japanese yen.

USD/JPY - 114.13

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 113.92

Kijun-Sen level                  : 113.98

Ichimoku cloud top             : 113.50

Ichimoku cloud bottom      : 113.22

Original strategy  :

Buy at 113.25, Target: 114.45, Stop: 112.90

Position :  -

Target :  -

Stop : -

New strategy  :

Buy at 113.25, Target: 114.45, Stop: 112.90

Position :  -

Target :  -

Stop : -

Dollar’s retreat after rising to 114.33 suggests consolidation below this level would be seen and pullback to 113.50 cannot be ruled out, however, reckon 113.30-35 would limit downside and bring another rise later, above said resistance at 114.33 would extend recent upmove to 114.50-55 (100% projection of 108.13-111.78 measuring from 110.87), however, near term overbought condition should limit upside to 114.75-80 and price should falter below 115.00, bring retreat later.

In view of this, would not chase this rise here and would be prudent to buy dollar on pullback as 113.25-35 should contain downside. Only below previous resistance at 113.05 would defer and suggest top is formed, bring correction of recent upmove to 112.70-80 but reckon support at 112.39 would remain intact.